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Lifting the mandatory freeze on repossessions and auctions of debtors' main residences would be positive for Greek RMBS and cover pools, Fitch Ratings says. It would increase cash flows from recoveries and could shorten foreclosure timing assumptions. However, the increase in supply may prevent recovery rates and recovery times from returning to levels associated with a less distressed housing market.
A full assessment of the impact of lifting the moratorium would require additional detail on the scope of any exceptions and how they are determined. While recent comments by senior politicians in Greece indicate that the moratorium will not be extended beyond end-2013, this is politically contentious.
If the auction freeze were lifted, it would be credit positive for the underlying pools in Greek RMBS transactions and covered bond programmes. It would increase cash flows from loan recoveries, which have been limited despite the increase in residential mortgage defaults since 2010.
From September 2010, when the moratorium was introduced, cumulative net defaults rose and recoveries from Greek securitised residential mortgage portfolios in Fitch-rated RMBS transactions have not kept pace. They have fallen from around 13% prior to the moratorium to as low as 1% since. Lifting the moratorium would benefit Greek RMBS deals, which provision for full loan defaults, rather than just losses. Furthermore, the suspension on foreclosures in 2010 coincided with a substantial increase in arrears, suggesting that moral hazard concerns are legitimate.
However, the benefits of increased recovery cash flows would be partly offset by the pressure that additional excess supply may put on house prices. Lenders would probably try to strike a balance between commencing auctions and flooding the market with new supply. But while this might limit house price volatility, it may counteract any benefits for average foreclosure timings (which the moratorium has significantly increased). Foreclosure timings may even lengthen, depending on the extent of the removal of auction restrictions.
As a result, and depending on details and lender behaviour, we would anticipate making further adjustments to our house price decline (HPD) or recovery timing expectations if the moratorium were lifted. These were last updated in our Greek RMBS Criteria Addendum in July, when we increased our base case forecast for nominal average peak-to-trough Greek house price declines to 42% from 33%, in light of a very weak housing market and a lack of foreclosure data. We also lengthened our recovery timing expectations to five from four years, in part because of the extension of the mandatory auction freeze to end-2013.
Greek Finance Minister Yannis Stournaras said earlier in August that the moratorium on auctions for main residences worth up to EUR300,000 would not be extended again when it lapses at the end of this year. However, Prime Minister Antonis Samaras said on August 22 that the "primary residence of weak citizens and those who can prove they cannot service their debts... will be fully protected," while stressing that borrowers who could pay but chose not to would no longer enjoy protection from foreclosure. Fitch
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